Question

When a parent company requires its wholly owned subsidiary to use “push-down” accounting, the subsidiary records an account called re-evaluated capital. This account represents

   a. the increase in fair market value and goodwill components of the parent’s purchase price.

   b. the ending balance of the investment account on the parent’s books using the equity method.

   c. the increase in fair market value of the subsidiary’s stock as a result of the purchase.

d. the new owners’ equity account of the subsidiary after elimination of common stock and retained earnings.

13. Purple Company owns 60% of the stock of Sapphire, Inc.; 75% of the stock of Green Company; and 40% of Blue, Inc. Sapphire owns 30% of Yellow, Inc. and 20% of Blue, Inc. Which companies will be consolidated with Purple?

a. Sapphire and Green       b. Sapphire, Blue and Yellow  

c. Green, Blue, and Sapphire       d. Sapphire, Green, Blue and Yellow

Answer 1

When a parent company requires it's wholly owned subsidiary to use push down accounting the subsidiary records an account Called re-evaluated capital. This account represents 1) increase in fair market value and goodwill components of parent purchase price. As in push down accounting the financial statements are revalued at fair market value and not in historical cost.

13- d) SAPPHIRE, GREEN,BLUE AND YELLOW ARE THE COMPANIES THAT WILL BE CONSOLIDATED WITH PURPLE AS purple owns 60% stock of sapphire and 75% of green and 40%of blue and sapphire owns 30% stock of yellow. According to the Company's act , the company which owns more than 51% or 51% of the another Company's stock, then the rights of that company is transferred to the owner of the company. So, sapphire 60% of the stock was owned by purple company so, the rights and authority is also transfer to purple company. So, the company which Sapphire owns will also counts under purple company. Therefore purple company will consolidate with Sapphire, Green , Blue and Yellow companies.